HARP II: Fannie and Freddie Release Expanded HARP Refinance Rules

by Alex Stenback on November 17, 2011

Late in the day Tuesday, Fannie and and Freddie released their bulletins outlining the specific changes to the HARP, or Home Affordable Refinance Program.

[ If you are just picking this up now: HARP (now HARP II) is designed to help borrowers who may be underwater, or have little or no equity in their homes by making a refinance easier and more affordable. More on this here, but the changes will allow refinancing of loans that are more than 125% of the homes value, ease or eliminate the appraisal requirements, and a number other factors that will make it easier and cheaper for homeowners to take advantage of today's ultra-low rates.]

[This will be mostly gibberish to anyone but a lender, but for those interested, or suffering from insomnia, the actual updates are online here (Fannie) and here (Freddie) ]

Rather than attempt to put the changes to prose, I will just run them out for you below, Q&A style, but will add three important thoughts to keep in mind as you read:

1. Think ‘Phased’ Changes: Though the expanded rules have been published, the specific changes themselves will not go into effect right away, and will be phased in over the coming months. This is SOP for the Agency’s when announcing new or major product changes, and it means it could be 4-5 months before loans can actually close under some of the expanded rules. Other rules changes will be adopted much more quickly than that, however.

2. Lender Participation is Still TBD: The HARP program remains voluntary for lenders. While the agencies have made changes to incentivize more uniform and widespread adoption HARP II rules by lenders/servicers, it will still be some time before each lender analyzes these changes, assesses the risk, and decides which they will allow, which they won’t, under which circumstances, and when.

3. Change is Assured: This is a complicated program, with many counterparties (mortgage insurers, second mortgage lenders, servicers, originators, the agencies themselves) needing to act in concert. No easy task. This will take time to sort out, and inevitably the rules will undergo some tweaks as the involved parties attempt to figure this out in a practical “can we start closing loans” kind of way.

Read the Q&A, after the jump…

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HARP II Q & A: There are substantial, material differences in the way Fannie and Freddie are applying the HARP II rules, so I have split them up into separate Q & A’s. Today, I will tackle Freddie. Fannie will be tomorrow.

[ You can determine whether your mortgage is owned by either Freddie Mac or Fannie Mae by checking the follwing websites: http://www.freddiemac.com/mymortgage or http://www.fanniemae.com/loanlookup/ ]

Freddie Mac HARPII/Relief Refinance [open access] | You do NOT have to refinance with the same lender/servicer that currently holds your loan.

When can my HARP II refinance close? Except where noted, these changes will not be implemented until about March 15th 2012. I’ll update this Q&A as more information and new questions come up. It is important to note that you might be able to take advantage of the HARP II changes as early as January if you refinance with your current servicer. Same-servicer HARP rules are fairly different than the open access rules, so check with your servicer for details.

When will the progam expire? Loans under HARP II must close before Dec 31st 2013

What are the eligibility dates? Only Fannie or Freddie Mac Owned loans that closed prior to June 1st, 2009 are eligible for HARP II

Can I refinance with HARP II if my loan is more than 125% of my value?

Yes, Freddie Mac is removing the maximum loan-to-value ratio limit. However, this ONLY applies to new Fixed Rate Mortgages with terms up to 30 years. Loans with terms greater than 30 years, or Adjustable Rate Mortgages (ARM’s) with fixed terms of 5 Years or more are limited to 105% of value.

However: If your new first mortgage is less than or equal to 80% of value, the maximum total loan to value (first and seconds combined) may not exceed 105%, no matter the new mortgage type.

Will I need a physical appraisal of my property?

Not necessarily, but maybe. Lenders have two choices:

- Option 1: An automated appraisal through Freddie Mac’s proprietary Home Value Explorer, or HVE. Only for 1-2 unit properties, automated results must have a high or medium “confidence” factor (technicality, which basically means the automated appraisal is statistically sound as a measure of value.)

- Option 2: Obtain a new appraisal. This will be a less appealing option, since the lender then must stand behind the value and condition of the property, and is on the hook if in the future the value or condition is deemed to be misrepresented. I expect most lenders to follow option 1.

Can I combine a first and second mortgage?

No. All existing subordinate financing must be resubordinated (read: Stay in place) and cannot be paid with proceeds of the new mortgage.

Can I take out a new second mortgage at the same time as my HARP II refinance?

No. New subordinate financing is not permitted.

Can I refinance my second mortgage at the same time as my 1st?

yes, provided the terms of the second improve (payment must go down.)

Will I be restricted by loan type?

To a certain extent yes. You cannot take an ARM loan with a initial fixed rate period of less than 5 years. Aside from that, HARP refinancing does not restrict product type, but requires one of the following Borrower benefits: Reduce interest rate, Reduce monthly principal and interest payment, shorten the term, go from ARM to fixed, or interest only to amortizing.

Can a refinance my current loan into an Adjustable Rate Mortgage?

Yes, but the loan-to-value cannot exceed 105%, and ARM’s with initial fixed rate periods of less than 5 years are not allowed under HARP.

What if my payment history is not perfect. Will I be eligible for HARP II?

A perfect payment history is not required. Technically, there is no minimum required standard here, and the acceptability of the payment history will be determined by Freddie’s automated underwriting software. That said, I expect a few lenders to maintain an ‘overlay’ that requires no more than 1 30-day lates in the last 12 months.

Can my payments go up when I refinance?

Yes. There is no limit to the amount the payment may increase, so long as one of the other “borrower benefit” provisions are met: Reduce interest rate, shorten the term, go from ARM to fixed rate, or interest only to amortizing.

Will I have to document my income to refinance?

It depends. Technically, Freddie’s automated underwriting engine will determine the documentation requirements, so the results here will be HIGHLY dependent on other aspects of the loan file (LTV, Credit Score, Assets, etc.) At a minimum, a verbal verification of employment will be required, and at least one borrower must have a source if income.

What is I am self employed, will income documentation requirements differ?

Yes. Again, the ultimate determination will be made by Freddie’s automated underwriting software, so mileage will vary, but at a minimum you can expect verification of the existence of the business to be required.

Will investment properties and second homes be eligible?

Yes. Investment properties with 1-4 units, 1 unit second homes will be eligible, with some restrictions on both.

Will I be able to add closing costs to my refinance?

Yes. For loans greater than 80% of value, the lesser of 4% of the unpaid principal balance or $5000 in related closing costs/pre-paids/escrows may be added.

For loans less than 80% of value, you can add all related, bona-fide closing costs to the loan.

Can I get cash back at closing?

Yes, but only if the new first mortgage will be less than 80% of value, and the cash back amount does not exceed 2% of the new loan amount, or $2000 dollars, whichever is less.

For loans where the first mortgage is more than 80% of value, the cash back cannot exceed $250.

If I am bring cash to closing, will this cash be verified? Yes. Freddie’s automated underwriting software will determine the minimum documentation requirements. Expect to provide at least 30 days of bank statements.

Is there a minimum credit score required? Not technically,Freddie’s automated underwriting system will determine credit acceptability, but treatment will vary. Many lenders are expected to maintain minimum credit score requirements. Cuurently they range from 620-640, depending on the lender.

If I have mortgage insurance, will I be able to refinance?

Cautiously, yes. All of the details have not yet been worked out between the lenders/servicers, so we will have to punt a little until we see better guidance, but so long as the same percentage of coverage is maintained on the new loan, as existed on the original loan, for the entire unpaid principal balance, there’s nothing in the Freddie rules that prevent this.

What if I have LPMI, or Lender Paid Mortgage Insurance?

Maybe, but so far it does not look good. Previously, both LMPI borrowers and those who paid a single, up-front premium ran aground on the technicality that lenders and insurers just could not figure out how to effect this transfer.

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Interested in a HARP Refinance? Drop me a line with a few bullet points on your situation, and I will do my level best to help you determine if this is a good fit for you.

In order for this program to work effectively you need to be able to refinance borrowers who currently have Mortgage Insurance on there loan. I receive calls from people all day long who qualify for HARP except they have MI. Please let the decision makers know what is happening in the real world.